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Full Text of Decision

40473

42470SERVICE DATE – LATE
RELEASE JUNE 20, 2012

EB

SURFACE TRANSPORTATION BOARD

DECISION

Docket No. EP 290 (Sub-No. 5) (2012-3)

QUARTERLY RAIL COST ADJUSTMENT FACTOR

Digest:[1]The rail cost adjustment factor (RCAF) is an
index formulated to represent changes in railroad costs incurred by the
nation’s largest railroads over a specified period of time.The statute requires the Surface
Transportation Board to publish the RCAF on at least a quarterly basis.Each quarter, the Association of American
Railroads computes three types of RCAF figures and submits those figures to the
Board for approval.The Board has
reviewed the submission and adopts the RCAF figures for the third quarter of
2012.

Decided:June 20,
2012

In Railroad
Cost Recovery Procedures, 1 I.C.C. 2d 207 (1984), the Interstate Commerce
Commission (ICC) outlined the procedures for calculating the all-inclusive
index of railroad input prices and the method for computing the rail cost adjustment
factor (RCAF).Under the procedures, the
Association of American Railroads (AAR) is required to calculate the index on a
quarterly basis and submit it on the fifth day of the last month of each
calendar quarter.In Railroad Cost
Recovery Procedures—Productivity Adjustment, 5 I.C.C. 2d 434 (1989), aff’dsub nom.Edison Electric Institute v. ICC, 969
F.2d 1221 (D.C. Cir. 1992), the ICC adopted procedures that require the
adjustment of the quarterly index for a measure of productivity.

The
provisions of 49 U.S.C. § 10708 direct the Surface Transportation Board (Board)
to continue to publish both an unadjusted RCAF and a productivity-adjusted
RCAF.In Productivity
Adjustment—Implementation, 1 S.T.B. 739 (1996), the Board decided to
publish a second productivity-adjusted RCAF called the RCAF-5.Consequently, three indices are now filed
with the Board:the RCAF (Unadjusted);
the RCAF (Adjusted); and the RCAF-5.The
RCAF (Unadjusted) is an index reflecting cost changes experienced by the
railroad industry, without reference to changes in rail productivity.The RCAF (Adjusted) is an index that reflects
national average productivity changes as originally developed and applied by
the ICC, the calculation of which is currently based on a 5-year moving
average.The RCAF-5 is an index that also
reflects national average productivity changes; however, those productivity
changes are calculated as if a 5-year moving average had been applied
consistently from the productivity adjustment’s inception in 1989.

The index
of railroad input prices, RCAF (Unadjusted), RCAF (Adjusted), and RCAF-5 for
the third quarter of 2012 are shown in Table A of the Appendix to this decision.Table B shows the first quarter 2012 index
and the RCAF calculated on both an actual and a forecasted basis.The difference between the actual calculation
and the forecasted calculation is the forecast error adjustment.

In its
submission, AAR states that during April, one railroad revised Materials &
Supplies (M&S) pricing data that had been used in the first and second
quarter 2012 calculations. According to
AAR, both revisions caused the M&S component to be 0.1 points lower than
previously reported. AAR proposes that
the Board use this quarter’s forecast error calculation to account for any
differences caused by the first quarter 2012 revision. In the fourth quarter filing AAR plans to use the
fourth quarter 2012 forecast error calculation to account for any differences
caused by the second quarter 2012 revision.

The Board
has used the forecast error adjustment procedure to remedy similar errors, and
we believe it is the best available method to account for the corrected M&S
component figures.[2]Therefore, we will not restate the first
or second quarter 2012 RCAF figures, but rather will allow the corrections to
be made using the forecast error calculations.As a result, the third quarter 2012 forecast error calculation will
include the original 263.7 figure as the “forecast” version of the first
quarter 2012 M&S component, and the corrected 263.6 figure as the “actual”
version of the first quarter 2012 M&S component.In the fourth quarter index calculation, the
fourth quarter 2012 forecast error calculation will include the original 274.1
figure as the “forecast” version of the second quarter 2012 M&S component,
and the corrected 274.0 figure as the “actual” version of the second quarter
2012 M&S component.In the current
third quarter 2012 RCAF calculations, the M&S component has been calculated
as if the second quarter 2012 version had used the corrected figure.[3]

We
have examined AAR’s calculations and we find that AAR has complied with our
procedures.We find that the third quarter
2012 RCAF (Unadjusted) is 1.171, a decrease of 1.2% from the second quarter
2012 RCAF of 1.185.[4]The RCAF (Adjusted) is calculated, in part,
using the RCAF (Unadjusted) and a 5-year moving geometric average of
productivity change for U.S. Class I railroads from 2006-2010, which is 1.008
(0.8% per year).We find the RCAF
(Adjusted) is 0.513, a decrease of 1.3% from the previously reported second
quarter 2012 RCAF (Adjusted) of 0.520.[5]

In
accordance with Productivity Adjustment—Implementation, 1 S.T.B. at
748-49, the RCAF-5 for this quarter will use a productivity trend for the years
2005-2009, which is 1.014 (1.4% per year).We find the RCAF-5 for the third quarter of 2012 is 0.485, a decrease of
1.4% from the previously reported second quarter 2012 RCAF-5 of 0.492.[6]

This
decision will not significantly affect the quality of the human environment or
the conservation of energy resources.

Authority:49 U.S.C. § 10708.

It is ordered:

1.The Board has approved the third quarter 2012
RCAF (Unadjusted) of 1.171, RCAF (Adjusted) of 0.513, and RCAF-5 of 0.485.

[1]The digest constitutes no part of the
decision of the Board but has been prepared for the convenience of the
reader.It may not be cited to or relied
upon as precedent.Policy Statement
on Plain Language Digests in Decisions, EP 696 (STB served Sept. 2, 2010).

[3]The Western Coal Traffic League (WCTL) filed
a letter on June 7, 2012, in response to AAR’s submission addressing the
revised M&S pricing data.As WCTL
notes, our use of the forecast error adjustment “follows past practice” for
addressing a party’s errors in the calculation of M&S component
figures.WCTL Letter 1.In addition, no party has asked the Board to
restate any of the previously published figures, and WCTL does not propose an
alternative approach to resolving the issue now before the Board.As such, here, we will account for the
corrected errors in the M&S component figures as described above.

[4]The percent changes for the third quarter
2012 RCAF (Unadjusted), RCAF (Adjusted), and the RCAF-5 are all based on the
original second quarter 2012 figures.

[5]The third quarter 2012 RCAF
Adjusted (0.513) is calculated by dividing the third quarter 2012 RCAF
Unadjusted (1.171) by the third quarter productivity adjustment factor of
2.2815.The third quarter 2012
productivity adjustment factor is calculated by multiplying the second quarter
2012 productivity adjustment of 2.2769 by the fourth root (1.0020) of the
2006-2010 annual average productivity growth rate of 0.8%.

[6]The third quarter 2012 RCAF-5 (0.485) is
calculated by dividing the third quarter 2012 RCAF Unadjusted (1.171) by the third
quarter productivity adjustment factor-5 (PAF-5) of 2.4146.The third quarter 2012 PAF-5 is calculated by
multiplying the second quarter 2012 PAF-5 of 2.4062 by the fourth root (1.0035)
of the 2005-2009 annual average productivity growth rate of 1.4%.

[1]The second
quarter 2012 forecast includes a revision made to the Materials & Supplies
component.

[2]“Other Items”
is a combination of Purchased Services, Casualties and Insurance, General and
Administrative, Other Taxes, Loss and Damage, and Special Charges, price
changes for all of which are measured by the Producer Price Index for
Industrial Commodities Less Fuel and Related Products and Power.

[3]Linking is necessitated by a change to the
2010 weights beginning in the fourth quarter of 2011.The following formula was used for the
current quarter’s index:

3rd Qr. 2012 Index

(2010 Weights)Times2nd Quarter Linked
IndexEquals Linked Index

2nd Qr. 2012 Index(1980 = 100 Linked)(Current Quarter)

(2010 Weights)

Or

298.5X296.6=289.4

305.9

[4]The first
quarter 2008 RCAF was rebased using the October 1, 2007 level of 245.9 in accordance with the requirements of the Staggers
Rail Act of 1980 (10/1/2007 = 100).

[5]The third
quarter 2012 forecast error adjustment was calculated as follows:(a) first quarter 2012 RCAF using
forecasted data equals 117.6; (b) first quarter 2012
RCAF using actual data equals 117.0; (c) the difference equals
the forecast error (b-a) of -0.6.Because the actual first quarter value is less than the forecast value,
the difference is subtracted from the Preliminary RCAF.

[6]The forecast
error adjustment calculation for the third quarter of 2012, which is based on
figures from the first quarter of 2012, uses the
original version of the M&S component (263.7) as the “forecast”
figure and the corrected version of the M&S component (263.6) as the “actual”
figure.